You work hard for your money, and everyone deserves an income. However, think ahead before spending money from your company, because the ATO want their cut, too.
There are a few main options for taking your hard-earned money to enjoy outside the company structure running your business. Each has different applications and Chromatic can help strategise the best combination for your circumstances. We like to touch base before the end of financial year so you have time to consider and implement your best course of action.
Wages and Salary
Drawing a regular wage is an easy, predictable way to pay yourself from your company-run business. This makes the company your employer and opens all directors to personal liability if PAYGW and superannuation are not paid correctly and on time. If you are unsure of the optimal amount to pay yourself or how to manage your employer obligations, have a chat with us.
+ Makes finance applications more straightforward
+ Routine, predictable
+ Super and personal tax paid for you
- Company has tax and super obligations
- Cashflow required to support regular salary
- Staffing on-costs may be increased if you also have a large team
Director Fees
Director fees can be thought of as intermittent or on-demand wage payments (or bonuses, if you like) to the working (or even non-working) Directors. The same PAYG and super obligations apply.
+ Flexibility, less cash flow demand
+ Proportionate super and personal tax paid for you
- Company has tax and super obligations
- Director fees are counted for Payroll Tax and Workers Compensation
Dividends
Dividends may be an option if you own the shares in the company. If others own the same type of shares, any dividends paid to you will also be paid to them in proportion to the number of shares owned. Most commonly, we see ORD shares, but if there are other types of share issued, their entitlement to dividends may need to be confirmed. The benefit of well planned dividend payments is that tax the company has paid in the past becomes a tax credit to the receiving shareholders, via dividend franking. This is intended to avoid taxing the same earnings again, and depending on the recipient's tax situation and rate there may be an adjusting amount, that is, a refund or "catchup" tax payable. Certain conditions must be met before the company can pay any dividends, namely: 1. it has positive net assets before and after the payment 2. the dividend is fair and reasonable to the shareholders as a whole, and 3. the dividend does not hinder the company’s ability to pay its creditors. Essentially there need to be profits accrued in the company and it needs to be able to keep up with it's other obligations after the payment is made.
+ Franking Credits may help ease tax impact to shareholders
- ALL shareholders of the eligible class must be paid the same amount per share
Loans
Loans from a company to a related person or 'associate' are something of a 'touchy subject' with the ATO and the definition is rather broad. If not managed correctly and the requirements of Division 7A of the Income Tax Assessment Act 1936 clearly met, amounts drawn from a profitable company will become fully taxable for the borrower.
If you are concerned about the risks of an existing or contemplated loan, talk to a friendly advisor today.
+ IF you have lent money TO the company, you can draw this back tax-free
- If the company lends money to or pays expenses for you, this may be deemed taxable without any tax credits to soften the blow
At Chromatic, we try to look ahead and mitigate potential problems before it becomes too late (and you don't get a shock like our spend-happy friend here!).
Many of our clients are small, family-owned businesses, so while our general information is set out with them in mind, we welcome enquiries from businesses of all shapes and sizes.
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